Shares of ITC were trading 3 per cent lower at Rs 226 on the BSE in Friday's intra-day trade as investors booked profit in the counter following the firm's December quarter numbers. The company, on Thursday, reported an 11.6 per cent drop year-on-year (YoY) in its consolidated profit to Rs 3,663 crore in the December quarter (Q3FY21). The profit was impacted by lower operating profit and higher tax provisioning. The board declared an interim dividend of Rs 5 per share.
With today’s decline, the stock of ITC has slipped 8 per cent from its 52-week high level of Rs 239 touched on February 9 in intra-day trade. Despite the fall, in the past one month, ITC has outperformed the market by gaining 6 per cent as compared to a 4 per cent rise in the S&P BSE Sensex.
The company posted revenue growth of 4.7 per cent YoY to Rs 12,580 crore led by strong growth in agribusiness and moderate growth in the fast-moving consumer goods (FMCG) business. Cigarette segment saw muted sales growth of 3.5 per cent with slower recovery in cigarettes volumes. A strong sequential recovery momentum continues across segments, including cigarettes, the company said.
Operating profit fell 7.2 per cent to Rs 4,281 crore, while margins contracted 437 basis points (bps) to 34 per cent mainly impacted by negative operating leverage due to cigarette volume decline. However, FMCG business margins continue to remain in an upward trajectory. FMCG EBITDA margins improved 144 bps to 9.2 per cent.
The brokerage ICICI Securities believe cigarettes volumes have still not recovered fully given prevalent work from home culture and restricted outdoor activities (restaurants, pubs still not fully operational). It also believes the company would have increased the trade discounts considerably in the last three months, which would have also impacted cigarettes sales.
However, there has been stability in taxation in the last three years (given excise was hiked only once in 2020 Budget). Taxation on cigarettes is likely to remain stable in future as well, believes I-Sec, which would help the industry to recover cigarette volumes in the next two years. FMCG business operating margin is increasing on a continuous basis.
“We believe margins territory would remain upwards with strong growth in packaged food categories. Meanwhile, the change in capital allocation strategy with higher dividend pay-out & lower capex in hotels would result in significant improvement in return ratios, going forward. We remain positive on the company backed by strong growth in FMCG business and improvement in its margin trajectory,” the brokerage firm said in a note.
Meanwhile, analysts at Emkay Global believe that further recovery in cigarettes and other divisions can lead to an upgrade in FY22/23 forecasts.
"ITC’s increased aggression on innovations and cost efficiencies are encouraging. Valuations at 16x FY23E provide attractive upsides. We maintain Buy with a revised TP of Rs 265, based on 18x March 23E EPS," they said.